The practical application of this two-part limitation is not as straightforward as it may seem.
Key takeaways
Taxpayers should consider the basis of the particular QSBS shares they sell in any given year.
Section 1202 provides special rules for calculating basis in certain scenarios.
Excludable gain from a QSBS sale is generally limited to $10 million or 10 times the stock basis
Internal Revenue Code section 1202 provides for a 100% exclusion from gain on the sale of qualified small business stock (QSBS) acquired on or after Sept. 27, 2010. For a summary of the key provisions of section 1202, see our article Understanding the qualified small business stock gain exclusion.
Although the Build Back Better Act, proposed by Congress in late 2021, included a provision that would have significantly curtailed the section 1202 exclusion benefit,1 that proposal was not passed into law.
The amount of gain a taxpayer may exclude under section 1202 is generally limited to the greater of $10 million or 10 times the aggregate adjusted basis of the QSBS that a shareholder sold during a taxable year, further detail below.
Example: John purchased QSBS for $2,000 from ABC Corp. Six years later, John sold his stock for $12 million. John may exclude $10 million of gain on the sale of his QSBS.
Example: Assume the same facts, except that John purchased the QSBS for $2 million. John may exclude $20 million on the sale of his QSBC (10 times his stock basis of $2 million).
The exclusion limitation rule begs several questions:
- How exactly should a taxpayer calculate the exclusion?
- If holding shares of a corporation’s stock purchased in different issuances on different dates, how does the taxpayer take into account the two limitations when determining which shares to sell first?
- What practical steps can a taxpayer take to reap the full benefit of the section 1202 exclusion?
Section 1202 overview
Section 1202 provides an exclusion from income for noncorporate taxpayers who realize capital gain on the sale or exchange of QSBS they have held for more than five years (“eligible gain”). One hundred percent of the gain on the sale of stock acquired after Sept. 27, 2010, is excluded from gross income, while 75% or 50% (depending on the date of acquisition) of gain on the sale of stock acquired prior to Sept. 28, 2010, is excluded.2
The taxpayer must have acquired the stock directly from the issuing corporation. The aggregate gross assets of the issuing corporation, including cash the corporation received as part of the stock issuance, must not have exceeded $50 million at any time prior to or immediately after the stock issuance.3 The issuing corporation must be a domestic C corporation and conduct a qualified trade or business (QTOB), which is defined as any trade or business not specified as nonqualifying in the statute.4
Calculating the exclusion: The basics
When recognizing gain on the sale of QSBS of a corporation, the maximum amount a taxpayer may exclude for a tax year (the “exclusion cap”) is the greater of:
a) $10 million, reduced by the aggregate amount of the taxpayer’s eligible gain previously claimed under section 1202, relating to dispositions of stock of the same corporation (the “$10 million limitation”)
b) 10 times the aggregate adjusted basis of QSBS issued by the corporation and sold by the taxpayer during the tax year (the “10-times-basis limitation”).5
Accordingly, a taxpayer must compute the allowable exclusion on an annual basis.
Example: In 2015, John acquired stock of ABC Corp., a QSB. He has zero basis in his stock. In 2018, he sells some of his ABC Corp. stock for $1 million, but does not exclude any of the gain on sale since he did not hold the stock for five years. In 2021, he sells additional stock for $3 million, recognizes a gain of $3 million, and excludes the $3 million of gain under section 1202.
In 2022, John sells his remaining ABC Corp. stock for $15 million and recognizes $15 million of gain. He may exclude $7 million of the gain ($10 million, less the $3 million of eligible gain previously excluded) under section 1202.
Note a distinction between the two limitations: The $10 million limitation is an aggregate limitation (and therefore takes into account eligible gain from prior years), while the 10-times-basis limitation is an annual limitation (and therefore does not take into account eligible gain from prior years).
Example: Jane holds stock in ABC Corp., a QSB, with zero basis. In 2021, she sells most of her stock and realizes an $18 million gain, of which she may exclude up to $10 million. In 2022, she sells the remaining stock and may not exclude any of the gain.
Example: Assume the facts in the previous example, except that Jane has a basis of $1.5 million in the stock she sells in 2021. Jane may exclude $15 million of her gain on her 2021 sale. Her basis in the stock she sells in 2022 is $1 million. Jane may exclude $10 million of her gain on that sale.
Because the 10-times-basis limitation hinges on the taxpayer’s stock basis, taxpayers should consider the basis of the particular shares they sell in any given year.
Example: Jane holds QSB stock in ABC Inc., consisting of (a) 1 million shares of Class A stock worth $40 million, with a basis of $2 million, and (b) 1 million shares of Class B stock worth $40 million, with a basis of $3 million. This year Jane plans to sell 1 million shares of her stock, half her total shareholdings.
If Jane sells her Class B shares, she may exclude $30 million of gain and recognize $7 million of gain—the remainder of the $40 million, less her basis of $3 million. If she instead sells her Class A shares, she may exclude only $20 million of gain and must recognize $18 million of gain—the remainder of the $40 million, less her basis of $2 million.6
For any given year, an individual must utilize either the $10 million limitation or the 10-times-basis limitation. In a single year, a taxpayer cannot utilize both the portion of the $10 million limitation not used in prior years plus 10 times the basis of stock sold in the current year.7 However, the individual can utilize the $10 million limitation in one year and the 10-times-basis limitation in the following or prior years.8 Accordingly, a taxpayer can control the sale of stock from year to year in a manner that provides the greatest exclusion possible.
For example, because the 10-times-basis limitation is annual, a taxpayer who utilized the entire $10 million limitation in a given year can still exclude gain in a future year by utilizing the 10-times-basis limitation.
Example: John holds QSBS consisting of (a) 1 million shares of Class A stock with a basis of zero, and (b) 1 million shares of Class B stock with a basis of $1 million. John plans to sell a million shares of stock this year and must decide whether to sell his Class A or Class B stock. John thinks it is advantageous to sell his Class B stock this year, because, if section 1202 would be unavailable to exclude gain, he would at least obtain the benefit of the $1 million basis offset. However, selling in that order would be a costly mistake.
If John sells his Class B shares this year, he may exclude $10 million of gain (under both the $10 million limitation and the 10-times-basis limitation). However, when he later sells his Class A shares he will not be entitled to any gain exclusion—the 10-times-basis limitation will be unavailable because he has no basis in his Class A stock, and the $10 million limitation will be unavailable because he had utilized it entirely when he sold the Class B shares.
If John instead sells his Class A shares this year, he may exclude $10 million of gain under the $10 million limitation. When he later sells his Class B shares, he will be entitled to exclude another $10 million under the 10-times-basis limitation. By selling his stock in this order, he will have doubled his exclusion.
The exclusion cap is per corporation, per taxpayer.
Example: John owns 100% of the stock of ABC Corp. Mike owns 100% of the stock of DEF Corp. John and Mike also own all the stock of XYZ Corp., an unrelated corporation (each owns 50%). Each of the three corporations qualifies as a QSB. They later sell all their stock in the three corporations (in which each has minimal basis). John realizes gain of $12 million from both ABC Corp. and XYZ Corp. Mike likewise realizes gain of $12 million from both DEF Corp. and XYZ Corp. (Their collective total gain is $48 million.)
John may exclude $10 million on the sale of his stock of each corporation, and Mike may exclude $10 million on the sale of his stock of each corporation (for a collective total gain exclusion of $40 million).
For stock held by a pass-through entity (a partnership or S corporation), the exclusion cap is computed on a partner/shareholder-level basis and not an entity-level basis.9
Example: In 2016, XYZ LLC, a private equity fund taxed as a partnership, purchased all the stock of ABC Corp., a QSB, for $1 million. At the time, XYZ LLC had 100 members (partners for tax purposes), each an individual owning 1% of the equity of XYZ LLC. These members’ LLC interests remained constant between 2016 and 2022. In 2022, XYZ LLC sold its ABC Corp. stock for $1.001 billion and realized a gain of $1 billion. Each member’s portion of the gain from the transaction was $10 million. Each member may exclude his or her entire $10 million gain.
Calculating the exclusion: Additional rules
28% rate: Section 1202 gain taxed at either the 75% or 50% exclusion is taxed not at the regular capital gains tax rate (currently 20%) but instead at a 28% base rate.10 Accordingly, QSBS purchased prior to Feb. 18, 2009, is effectively taxed at a rate of 14% (ignoring the net investment income tax, or NIIT).11
Note, however, that the 28% rate does not apply to gain from QSBS purchased after Sept. 27, 2010, and exceeding the exclusion cap, or from QSBS that held for less than five years. In such cases, the normal capital gains rate of 20% applies. The 28% rate applies specifically to gain resulting from the 75% or 50% exclusion rules.12
Alternative minimum tax (AMT): For purposes of computing the AMT, gain excluded under section 1202 on the sale of QSBS acquired on or after Sept. 27, 2010, is excluded, but the portion of gain exceeding the exclusion cap is included in the calculations.13
Net investment income tax: Gain excluded under section 1202 is not subject to the 3.8% NIIT.14 The portion of gain exceeding the exclusion cap, however, is subject to the NIIT.
Married individuals: In the case of married individuals filing separate returns, the $10 million limitation is reduced to $5 million per individual.15 It is not entirely clear whether this rule also applies to married individuals filing a joint return, a question beyond the scope of this article.
In the case of married individuals filing a joint return, for purposes of applying the limitation to subsequent taxable years, the limitation is allocated equally between the spouses, regardless of which spouse sells QSBS in any tax year.16 Accordingly, if the married individuals file separate returns in future years, each individual’s total limitation is treated as having previously been decreased by half of the QSBS they collectively sold in the prior year.
Example: John is married to Jane. In 2021 Jane sold stock of ABC Inc., a QSB, and recognized $4 million of gain. John and Jane filed their 2021 tax returns as married filing jointly, and they excluded the $4 million of gain on their joint return.
John and Jane each sell some of their ABC Inc. stock in 2022 and submit their 2022 tax returns as married filing separately. They may each exclude a maximum of $3 million on their individual 2022 tax returns ($5 million, less $2 million attributable to the exclusion taken in 2021).
Adjustments to basis: For purposes of the 10-times-basis limitation, additions to basis after the date on which the stock was originally issued are ignored.17 Accordingly, if a taxpayer who owns QSBS , whereupon an heir or beneficiary takes the stock with a step-up in basis to fair market value (FMV) on the date of the taxpayer’s death,18 the heir/beneficiary may not utilize the stepped-up basis when calculating the 10-times-basis limitation. In contrast, if the heir/beneficiary takes the stock with a step-down in basis to FMV, the heir/beneficiary must utilize the reduced basis when calculating the 10-times-basis limitation.19
Because additions to basis after the date on which the stock was originally issued are ignored, a shareholder of QSBS cannot contribute cash to the corporation after the original stock issuance in an effort to increase the basis and take advantage of the 10-times-basis limitation.
Example: In 2015, a private equity fund purchased 60% of the stock of ABC Corp., a QSB, for $2 million. In 2017, the fund makes a capital contribution of $1 million to ABC Corp. In 2021, the fund sells all its stock in ABC Corp. The fund’s basis in its ABC Corp stock is $3 million, but the fund’s basis for purposes of the 10-times-basis limitation is $2 million.
In the case of a corporation wholly owned by a single shareholder, the shareholder might initially contribute capital to the corporation in exchange for all the corporation’s stock and later contribute additional capital to the corporation without receiving additional shares in return. In such a case, the failure to take back additional shares might constitute a “meaningless gesture,” since doing so would have no economic impact.
In such a case, a question can arise as to whether the second capital contribution results in the deemed issuance of stock for purposes of section 1202. If so, the taxpayer would need to bifurcate shares for section 1202 purposes, testing each portion for QSB eligibility separately. This issue can also arise with regard to a closely held corporation if the shareholders contribute capital in proportion to their ownership share. We have discussed this question previously.20
Partners of a partnership that sells QSBS: If a partnership (or an LLC taxed as a partnership) sells QSBS, a partner (or member) may exclude individual gain received, assuming all the section 1202 requirements are met. Additionally, the partner must have owned the partnership interest on the date the partnership acquired the stock and at all times until the partnership disposed of the stock. For purposes of applying the exclusion cap, the partner’s basis is the proportionate share of the partnership’s adjusted basis in the QSBS.22
Example: Jane purchases one-third of a fund’s membership units for $5 million. The fund purchases stock in ABC Corp., a QSB, for $3 million. After five years, Fund ABC sells its stock of ABC Corp. for $50 million. For purposes of the 10-times-basis limitation, Jane’s basis is $1 million (her one-third share of the fund’s basis in its stock).
If the partner acquired an additional interest in the partnership after the partnership acquired the QSBS, the gain exclusion only applies to the partner’s share of the gain attributable to the partner’s share in the partnership at the time the partnership acquired the QSBS.23
Example: A fund forms in 2015 and issues 300 membership units, 100 of which it issues to Jane. In 2016, the fund purchases stock of ABC Corp., a QSB. In 2017, Jane purchases an additional 50 units from one of the other members; she thereupon becomes a 50% equity holder of the fund. In 2022, the fund sells its shares of ABC Corp. and realizes $3 million of gain. Jane’s share of the realized gain is $1.5 million.
Jane may exclude $1 million of her realized gain and must recognize the remaining $0.5 million of her realized gain.24
Order of application of the exclusion cap and percentage limitation: As noted above, section 1202 has two limitations: (1) the exclusion cap (the greater of $10 million or the 10-times-basis), and (2) for QSBS purchased prior to Sept. 27, 2010, the 50% or 75% exclusion limitations. The question of which limitation should be applied first is important because the order can affect the amount of gain excluded.
Example: John incorporated ABC Inc. in 2008 when the exclusion was 50%. In 2022 he sells his stock, in which he has zero basis, for $18 million. The $18 million of gain is limited by both (1) the $10 million limitation, and (2) the 50% exclusion. Should John first apply the $10 million limitation and then apply the 50% exclusion, yielding an exclusion amount of $5 million? Or should John first apply the exclusion of 50% (reducing the eligible gain to $9 million) and then apply the $10 million limitation, for a final exclusion amount of $9 million?
It appears a taxpayer should first apply the exclusion cap and then apply the percentage limitation.25
Accordingly, in the above example, John should first apply the $10 million limitation and then apply the exclusion of 50%, yielding an exclusion amount of $5 million.
Deferred payments and installment sale treatment
Various questions can arise when a taxpayer sells QSBS and receives deferred purchase price payments as consideration.
The taxpayer may exclude from taxable income any gain arising from such payments to the extent the gain does not exceed the exclusion cap, even though the payments are received in a future year. If able to completely exclude the gain (because it is less than the exclusion cap), opt to recognize the payments, and exclude all the gain, in the year of the sale (that is, elect out of the installment method).
If unable to exclude all the gain because a portion exceeds the exclusion cap, the taxpayer may wish to recognize the gain under the installment method (in which gain relating to proceeds received in a future year is not taxed until that year). Accordingly, under section 1202, both the taxpayer’s gain relating to purchase price paid in the year of sale is excluded up to the exclusion cap, and the gain relating to deferred payments is excluded up to the exclusion cap.26
A taxpayer cannot elect out of installment sale treatment for only a portion of sale proceeds.27
Example: In 2022, Jane sells her QSBS (in which she has zero basis) for $13 million. Under the terms of the purchase agreement, Jane will receive her sale proceeds as follows: $8 million at closing; $2 million in 2023, and $3 million in 2024.
Jane wants to elect out of installment treatment on the first $10 million, instead recognizing and excluding the full $10 million under section 1202; and she wants to utilize installment treatment for the final $3 million, recognizing that portion in 2023. However, this option is not available to Jane; she must utilize installment treatment either on the entirety of the deferred sale proceeds or on none of it.
This rule likely applies even if the taxpayer sold various classes of stock that constituted a single “disposition”.28
Example: Suppose Jane’s QSBS in the above example consists of Class A shares (worth $10 million) and Class B shares (worth $3 million). Jane sells all her stock and specifies that the sale proceeds she will receive in 2022 and 2023 are in exchange for her Class A stock, while the proceeds in 2024 are in exchange for her Class B stock.
Because she sold both classes of stock as part of a single disposition, Jane likely must choose to utilize installment treatment on all the deferred sale proceeds or on none of them.
Suppose a taxpayer sells two classes of stock, only one of which is QSBS. The buyer receives a portion of the sales proceeds on the closing date and a portion in a future year. The taxpayer likely must prorate the amounts of excludable gain and non-excludable gain between the gain taken in the year of sale and the gain taken in future years under the installment method.
Example: John owns 100 shares of ABC Inc. stock; 50 are Class A QSBS and 50 are Class B non-QSBS. In 2022, John sells all his ABC Inc. shares, in exchange for $4 million at closing and $4 million to be paid in 2023.
Of the $4 million he received at closing, John likely must treat $2 million as in exchange for the QSBS and $2 million as in exchange for the non-QSBS. Of the $4 million he receives in 2023, John likely must treat $2 million as in exchange for the QSBS and $2 million as in exchange for the non-QSBS.
If, however, as part of a purchase’s arms-length bargaining and/or sale agreements, the parties state that the QSBS is exchanged for the proceeds received at closing and the non-QSBS is exchanged for the proceeds received in a future year, it appears the taxpayer can reasonably opt to follow the agreed-upon allocation.29
A shareholder cannot report gain on the installment method in order to increase the stock holding period to five years. For example, a shareholder who has held stock for three years cannot sell stock in exchange for payments deferred for two years, report those payments on the installment method, and thereby satisfy the five-year holding period requirement.30
The 10-times-basis limitation for certain shareholders
Startup founders often do not contribute capital to their company and therefore have no basis in company stock. Even if a founder contributes valuable intellectual property to the company when incorporating it, the basis in the stock for general tax purposes is zero.31
Under section 1202, when a shareholder contributes property to a corporation in exchange for stock, the basis of the stock received is no less than the FMV of the contributed property.32 Therefore, for purposes of the 10-times-basis limitation, a founder’s basis in this situation is the FMV of the contributed property.
Example: In 2012, John founded a software business, taxed as a sole proprietorship. In 2014, John incorporated his business as ABC Corp. and took back 100 shares, which qualified as QSBS. At the time of the incorporation, the business had a FMV of $2 million and assets transferred in the incorporation had a zero basis. In 2021, John sells his 100 shares of ABC Corp. for $30 million.
Although his basis for purposes of computing his gain is zero, John’s basis for purposes of the 10-times-basis limitation is $2 million.
John’s realized gain is $30 million (the realized amount of $30 million less the zero basis). He may exclude $20 million of gain (10 times $2 million), but must recognize gain of $10 million (cash received of $30 million, less a basis of zero, less excluded gain of $20 million).
This rule also affects the basis of stock received upon the incorporation of a partnership (via either state law or a check-the-box election), which is generally treated for tax purposes as the contribution of property in exchange for stock.33 If a taxpayer received QSBS in a partnership incorporation, the taxpayer’s basis for purposes of the 10-times-basis limitation is no less than the FMV of the stock received and not the taxpayer’s carryover tax basis in the stock.34
Example: In 2012, ABC LLC, taxed as a partnership, issues 1 million equity units to Jane for $1 per unit ($1 million total purchase price). In 2015, the company incorporates, and equity holders receive stock in exchange for their equity units pro-rata. At the time, each unit is worth $4—Jane’s 2012 investment is now worth $4 million. Jane’s basis in her shares is $1 million, the same basis she had in her equity units. In 2021, Jane sells her million shares for $50 million.
Jane may exclude $40 million of gain (10 times $4 million). Jane must recognize gain of $9 million (cash received of $50 million, less basis of $1 million, less excluded gain of $40 million).
The rule that stock basis is no less than the contributed property’s FMV also affects the calculation of the gain exclusion. If a taxpayer contributed property to a QSB or received QSBS in a partnership incorporation, for purposes of computing the section 1202 exclusion the taxpayer’s basis is treated as no less than the FMV of the stock received.35 This rule is intended to ensure that the taxpayer's excludable gain is limited to the gain that accrues after the business’s incorporation.
Example: Assume the facts of the previous example, except that in 2021 Jane sells her shares for $11 million and not $50 million. Jane’s basis for purposes of calculating her section 1202 exclusion is $4 million (the FMV of her shares on the incorporation date) and not $1 million (the tax basis of her shares).
Jane can therefore exclude $7 million (cash received of $11 million, less $4 million). Jane must recognize $3 million (cash received of $11 million, less basis of $1 million, less excluded gain of $7 million). The $3 million is attributable to the built-in gain at the date of incorporation.
For purposes of the rule that stock basis is no less than the contributed property’s FMV, where the partnership incorporating holds both assets and liabilities, the taxpayer’s basis should reflect the partnership’s pre-incorporation asset FMV (including intangible value) less its liabilities.36
For a more comprehensive discussion of issues to consider when incorporating a partnership, see our article Incorporating a partnership to obtain section 1202 eligibility.
Obtaining the full benefit of section 1202
Taxpayers can obtain section 1202’s full benefit in several ways. Note that these tax planning ideas are highly fact-specific, and each taxpayer’s facts should be analyzed individually.
Gifting QSBS to a child or relative: Section 1202 states that although stock must be acquired at its original issuance to constitute QSBS, gifted QSBS generally continues to satisfy the original issuance requirement in the recipient’s hands.37 Accordingly, a shareholder whose gain on sale of QSBS would exceed the exclusion cap can gift a portion of the shares to one or more children or other relatives, whereby each recipient would obtain the benefit of an additional exclusion cap. For more details regarding the gifting of QSBS, see our article Maximize gain exclusions on the sale of qualified small business stock.
Gifting QSBS to a trust or multiple trusts: If the taxpayer has no relative to receive the shares, or anticipates gain exceeding the exclusion cap even after gifting some shares to relatives, gifting to one or more trusts is an option. Because the trust must consist of a taxpayer other than the grantor for federal tax purposes, a revocable grantor trust generally would not accomplish this goal.
Taxpayers must consider various factors to ensure that gifts to one or more trusts are respected for federal tax purposes, a topic discussed in our article Use of trusts for multiple qualified small business stock exclusions.
Conclusion
Section 1202 offers a significant tax benefit to shareholders who sell QSBS. Because the rules governing the QSBS gain exclusion are complex, we recommend consultation with a tax advisor prior to calculating and claiming it. Additionally, prior to selling stock, taxpayers should consult with a tax advisor to determine the steps to maximize the gain exclusion based on their unique circumstances.
1. Section 138149(a) of H.R. 5376 (Nov. 3, 2021).
2. Section 1202(a)(3) and (a)(4). The exclusion is 50% for QSBS acquired after on or after Aug. 10, 1993. It was increased to 75% for QSBS acquired after February 17, 2009, and then to 100% for QSBS acquired after September 27, 2010.
3. Section 1202(c)(1).
4. Section 1202(c)(1) and (e)(3).
5. Section 1202(b)(1). The adjusted basis of stock is determined for this purpose regardless of any addition to basis after the date on which the stock was originally issued, as discussed further below. Section 1202(b)(1)(B).
6. Conversely, if capital gain rates would significantly increase after the close of the year in which Jane sells her shares (and assuming section 1202 would be unaffected by legislation), Jane may in some situations be better off selling her Class A and not Cass B stock during that year. Selling the Class A shares would enable her to accelerate gain, by recognizing gain on the shares eligible for less gain exclusion and more includable gain.
7. See section 1202(b)(1) (the disjunctive “or” implies that only one of the two limits may be taken into account in any one year).
8. See section 1202(b)(1) (the cap of the greater of the two limitations applies to “gain for the taxable year”).
9. Section 1202(g)(1)(B).
10. Section 1(h)(4)(A)(ii).
11. If the BBB Act becomes law, this statutory rate will take on increased significance.
12. Section 1(h)(7).
13. Under section 57(a)(7), QSBS acquired before Sept. 28, 2010, includes in the computation of AMT income 7% of any gain excluded under section 1202. Gain from the sale of QSBS acquired after Sept. 27, 2010, however, is not subject to the AMT adjustment. Section 1202(a)(4)(C).
14. Section 1411(c)(1)(A)(iii) provides that net investment income includes “net gain (to the extent taken into account in computing taxable income).” Because gain from selling QSBS is not taken into account in computing taxable income, see section 1202(a)(1) and (a)(4)(A), such gain is also excluded from the NIIT tax.
15. Section 1202(b)(3)(A).
16. Section 1202(b)(3)(B).
17. Section 1202(b)(1) (flush language).
18. See section 1014(a).
19. Section 1202(b)(1) (flush language) (the language “any addition to basis” does not include reductions to basis; that language instead implies that reductions to basis are taken into account).
20. See Wiener and Gottschalk, “Travels through 1202,” Tax Notes Federal (Sep. 2021), pp. 2098-2099; Gruidl and Lieberman, “IRS memo could affect treatment of section 1202 and carried interests,” RSM Insights (Apr. 2019), available at https://rsmus.com/what-we-do/services/tax/federal-tax/tax-mergers-and-acquisitions/irs-memo-could-affect-treatment-of-section-1202-and-carried-inte.html.
21. Section 1202(g)(2)(B).
22. Section 1202(g)(1)(B).
23. Section 1202(g)(3).
24. The application of this rule to various types of partnership equity shifts is not addressed in this article. Where, for example, A and B are partners in ABC LLC, ABC LLC purchases QSBS, ABC LLC redeems some of A’s interests, and ABC LLC then sells its QSBS, a portion of the gain flowing up to B may arguably be ineligible for the gain exclusion because B’s proportionate interest in ABC LLC increased at the time of the redemption.
25. See section 1202(a) and (b)(1). For analysis of this issue see our article Wiener and Gottschalk, “Travels through 1202,” Tax Notes Federal (Sep. 2021), pp. 2098-2099.
26. In such a case, the taxpayer should perhaps consider the possibility that Congress will amend section 1202 and reduce the exclusion benefit. If so, and the taxpayer recognizes gain under the installment method, the portion of gain deferred to a year in which the reduced benefit applies would likely be subject to the reduced section 1202 regime.
27. Section 453(d)(1) (referring to an election to not apply the installment sale rules for “such disposition”).
28. Id.
29. See, e.g., Rev. Rul. 68-13, 1968-1.
30. See section 1202(b)(2) (“the term “eligible gain” means any gain from the sale or exchange of qualified small business stock held for more than 5 years” (emphasis added)).
31. See Section 358.
32. Section 1202(i)(1)(B).
33. See generally section 351; Rev. Rul. 84-111, 1984-2 CB 88.
34. Section 1202(i)(1)(B) states that for purposes of the 10 times basis limitation, the basis of stock received in exchange for property is no less than the fair market value of the property contributed.
35. Section 1202(i)(1)(B). See also H. Rept. No. 103-111 (PL 103-66), 603 (“only gains that accrue after the transfer are eligible for the exclusion”).
36. See section 358(a)(1) and (d).
37. Section 1202(h)(1)(A) and (h)(2)(A).
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